United States Court of Appeals
Fifth Circuit
F I L E D
Revised December 16, 2004
November 17, 2004
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
Clerk
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Cause No. 03-20983
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ROYAL INSURANCE COMPANY OF AMERICA,
Plaintiff-Appellant,
versus
HARTFORD UNDERWRITERS INSURANCE COMPANY,
Defendant-Appellee.
Appeals from the United States District Court
for the Southern District of Texas
Before JONES, SMITH and STEWART, Circuit Judges.
EDITH H. JONES, Circuit Judge:
Two insurance companies dispute whether their coverage of
claims against a nursing home is primary, excess or pro rata. The
district court held that one insurance company’s coverage was
primary and the other insurance company’s coverage was excess.
Based on Fifth Circuit precedent concerning Texas law, we disagree
and hold that both policies offer primary coverage, which must be
prorated. Accordingly, we REVERSE and REMAND for proceedings
consistent with this opinion.
Background
In the underlying suit, the estate and surviving family
members of deceased nursing home resident, Lawrence Knutson,
brought a wrongful death and survivor action against Riverside
Healthcare, Inc. (“Riverside”), for negligence, gross negligence,
and employee neglect.
Riverside was the named insured under a primary
Commercial General Liability and Health Care Professional Liability
policy issued by Hartford Underwriters Insurance Company
(“Hartford”), as well as a primary Commercial General Liability/
Resident Health Care Facility Professional Liability policy issued
by Royal Insurance Company of America (“Royal”). Because the
plaintiffs’ original complaint did not obviously trigger Hartford’s
policy, initially only Royal was notified of the lawsuit. However,
the plaintiffs later amended their complaint to trigger coverage
under Hartford’s policy.
In mid-November 2000, approximately six weeks after the
plaintiffs filed their amended complaint, Royal notified Hartford
of the underlying suit, expecting Hartford to join in the defense
and participate in a mediation scheduled for December 7, 2000.
Hartford declined to join in the defense or mediation, maintaining
that it had insufficient notice and time to prepare. Royal
proceeded with the mediation and settled the case for approximately
$950,000, plus $4,770 for the plaintiffs’ costs (within the one
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million dollar limit of Royal’s policy). Royal also paid
$132,516.64 for defense costs and fees. Royal made a demand to
Hartford for contribution, which Hartford refused. Royal then
brought this insurance subrogation action against Hartford to
recover half the settlement costs.
The instant appeal arises from the district court’s
conclusions that (a) the insurers’ Professional Liability (PL)
rather than Comprehensive General Liability (CGL) coverages pertain
to the underlying claim, and (b) Royal’s coverage is primary, while
Hartford’s coverage, because of its “other insurance” provision, is
excess (and thus not triggered here). Both companies provided
consecutive-year primary insurance policies with limits in the
amount of one million dollars each to Riverside for periods
covering the underlying action. Both policies provided coverage
under identical Commercial General Liability provisions, which
afforded pro rata distribution of liability. However, the
policies’ respective Professional Liability provisions contained
differing “Other Insurance” clauses: Royal’s clause provided for
pro rata coverage;1 Hartford’s clause provided for “excess
1
Royal’s “Other Insurance” Professional Liability Provision reads:
If other valid and collectible insurance is available to the insured
for a loss we cover under Coverage Form, our obligations are limited
as follows:
a. Primary Insurance
This insurance is primary except as described in Paragraph b.
below. Our obligations are not affected unless any of the
other insurances is also primary. Then we will share with all
that other insurance by the method described in Paragraph c.
below.
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coverage.”2 Resolution of the parties’ dispute turns first on
whether the underlying suit is governed by CGL or PL provisions.
If CGL provisions apply, then liability is undisputedly pro rata,
but if PL provisions apply, the companies’ respective liability
depends on the interrelation of the “other insurance” provisions.
While we agree with the district court that PL provisions apply to
. . .
c. Method of Sharing
If all the other insurance permits contribution by equal
shares, we will follow this method also. Under this approach
each insurer contributes equal amounts until it has paid its
applicable limits of insurance or none of the loss remains,
whichever comes first. If any of the other insurance does not
permit contribution by equal shares, we will contribute by
limits. Under this method, each insurer’s share is based on
the ratio of its applicable limit of insurance to the total
applicable limits of insurance to all insurers.
R. Vol. 6, pp. 347-48.
2
Hartford’s “Other Insurance” Professional Liability Provision reads:
If other valid and collectible insurance is available to the insured
for a loss we cover under Coverage D of this Coverage part, our
obligations are limited as follows:
a. This insurance is excess over any other insurance other
than insurance specifically arranged by you on an umbrella or
similar basis to apply excess of this coverage part.
b. When this insurance is excess, we will have no duty
under Coverage D to defend any claim or “suit” that any other
insurer has a duty to defend. If no other insurer defends, we
will undertake to do so, but we will be entitled to the
insured’s rights against all those other insurers.
c. When this insurance is excess over other insurance, we
will pay only our share of the amount of the loss, if any,
that exceeds the sum of:
(1) The total amount that all such other insurance
would pay for the loss in the absence of this insurance;
and
(2) The total of all deductible and self-insured
amounts under all that other insurance.
d. We will share the remaining loss, if any, with any other
insurance that is not described in these excess insurance
provisions and was not bought specifically to apply in excess
of the Limits of Insurance shown in the Declarations of this
Coverage Part.
R. Vol. 7, p. 247.
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the underlying suit, we disagree with the court’s conflicts
determination.
Standard of Review
This court reviews a district court’s grant of summary
judgment de novo, applying the same standards as the district
court. Mongrue v. Monsanto Co., 249 F.3d 422, 428 (5th Cir. 2001).
Interpretation of an insurance policy is a question of law.
Gladney v. Paul Revere Life Ins. Co., 895 F.2d 238, 241 (5th Cir.
1990).
Discussion
I. PL vs. CGL Coverage
The district court correctly applied PL provisions to the
underlying action.
To determine which coverage provision applies, we must
liberally construe the allegations as set forth in the complaint
“without reference to their truth or falsity, [] to what the
parties know or believe to be the true facts, [] to a legal
determination of the true facts,” or to the specific legal theories
advanced by the parties. See Duncanville Diagnostic Ctr., Inc. v.
Atl. Lloyd’s Ins. Co. of Texas, 875 S.W.2d 788, 789 (Tex. App.
1994, writ denied) (citing Heyden Newport Chem. Corp. v. S. Gen.
Ins. Co., 387 S.W.2d 22, 24-25 (Tex.1965)).3
3
See also Adamo v. State Farm Lloyd’s Co., 853 S.W.2d 673, 676 (Tex.
App.--Houston [14th Dist.] 1993, writ den’d); Continental Cas. Co. v. Hall, 761
S.W.2d 54, 56 (Tex. App. Houston [14th Dist.] 1988, writ den’d).
5
In the underlying suit, the Amended Complaint alleged:
Defendants failed to properly and timely render appro-
priate medical and nursing care by among other things
. . . allowing infections, skin ulcers and other disease
process[es] to continue without medical intervention
. . . failing to meet minimum diet standards for its
residents . . . failing to timely transfer Lawrence
Knutson to a higher level care facility when appropriate.
Defendants were negligent and grossly negligent in
management, budgeting, and in hiring practices . . .
orientation and training practices, and in supervision
of employees . . . .
. . . [breach] of the ‘Contract to Provide Nursing
Facility Services Under the Texas Medical Assistance
Program’ . . . by depriving and failing to provide
Lawrence Knutson with the care specified under the terms
of the contract . . . [and by] . . . various acts and/or
omissions . . . .
The gravamen of the plaintiffs’ allegations is negligent medical
care; but-for the alleged negligence, none of the other claims
would have been brought. Hartford’s contention that this or any
other interpretation that results in double coverage would
improperly render the PL coverage duplicative is unavailing.
Hartford’s argument would read certain terms out of the contract,
violating the principle that every term of a contract must be given
meaning. Transitional Learning Community, Inc. v. United States
Office of Personnel Management, 220 F.3d 427, 431 (5th Cir. 2000).
Here, liberally construing the terms of Hartford’s
policy, we find it most plausible that Riverside paid additional,
higher premiums for PL coverage precisely to cover incidents like
this case, where the lawsuit alleges negligence arising out of the
rendering of medical services. This construction gives the most
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meaning to the terms of Hartford’s policy and supports the view
that Riverside’s CGL coverage protected it, for instance, against
claims by someone slipping and falling in the waiting room, while
its PL coverage protected it from lawsuits by residents harmed by
treatment (or lack thereof) received at the facility. This view is
consistent with state and federal courts in this circuit that have
interpreted insurance policies containing both comprehensive and
professional liability provisions. See Harris Methodist Health
Sys. v. Employers Reinsurance Corp., No. 3:96-CV-0054-R, 1997 WL
446459, *3-*5 (N.D. Tex. July 25, 1997); Duncanville Diagnostic,
875 S.W.2d at 791; Guar. Nat’l, 909 F.2d at 135-36; Utica Nat’l
Ins. Co. of Texas v. Texas Property & Cas. Ins. Guar. Ass’n, 110
S.W.3d 450, 455-57 (Texas Ct. App. 2001). Thus, we agree with the
district court that the underlying lawsuit implicated the PL
provisions.
II. Conflict
On the other hand, we depart from the court’s view that
no conflict existed between the two policies. While the district
court’s interpretation — that Royal’s PL “Other Insurance” clause,
by its own terms, is primary, while Hartford’s PL “Other Insurance”
clause, by its own terms, renders its policy excess — is plausible,
it is contrary to controlling Fifth Circuit precedent.
Resolution of this issue turns on the breadth of the
Texas Supreme Court’s decision in Hardware Dealers Mut. Fire Ins.
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Co. v. Farmers Ins. Exch. 444 S.W.2d 583 (1969). In Hardware
Dealers, two companies — Hardware Dealers Mutual Fire and Farmers
Insurance — disputed their liability arising from an auto accident.
Hardware Dealers insured Frizzell Pontiac, a garage, for claims of
bodily injury or property damage incurred by customers and
employees permissively using a car belonging to Frizzell. 444
S.W.2d at 585. Farmers insured John Hyde under a standard
automobile insurance policy. Id. at 584. When John Hyde’s
daughter (who was covered under the policy) collided with another
automobile during a test drive, the dispute between the two
insurers began. Id. at 584. Both policies had “other insurance”
clauses: Hardware Dealer’s policy included a provision that
excluded from coverage permissive users of Frizzell Pontiac’s
automobile who were covered by other insurance. Id. at 585.
Farmer’s policy included an “other insurance” provision that
converted its coverage into excess insurance if other insurance
coverage existed. Id. at 584.
In a thorough opinion, the state supreme court discussed
the three types of “other insurance” provisions: (1) pro rata
clauses, which restrict the liability of concurring insurers to an
apportionment basis; (2) excess clauses, which restrict the
liability of an insurer to excess coverage (that pays out only
after the primary coverage is exhausted); and (3) escape clauses,
which avoid all liability in the event of additional coverage. Id.
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at 586. After evaluating the possible interpretations, the court
announced the following rule of interpretation:
When, from the point of view of the insured, she has
coverage from either one of two policies but for the
other, and each contains a provision which is reasonably
subject to a construction that it conflicts with a
provision in the other concurrent insurance, there is a
conflict in the provisions.
Id. at 589. After finding that the two policies conflicted (an
escape clause vs. an excess clause), the court concluded that in
such circumstances, Texas courts should ignore the conflicting
provisions, and instead apportion liability pro rata and require
both insurers to defend. Id. at 590.
This court has cautioned against applying overly narrow
constructions of the Hardware Dealers rule. In one case, we
expressly rejected an argument that distinguished Hardware Dealers
when an escape clause and a pro rata clause conflicted. St. Paul
Mercury Ins. Co. v. Lexington Ins. Co., 78 F.3d 202, 210 (5th Cir.
1996). In a footnote, this court explained that “Hardware Dealers
set forth a general principle for resolving conflicting ‘other
insurance’ clauses, and that principle controls our decision in
this case.” Id. at 210 n.25. Using the interpretation method
counseled by Hardware Dealers, this court determined that
Sanifill [the insured] would be entitled to full coverage
under Landmark’s policy were it not for the existence of
Centennial’s policy; and Sanifill would be entitled to
full coverage under Centennial’s policy were it not for
the existence of Landmark’s policy. In other words,
Landmark’s pro rata clause conflicts with Centennial’s
escape clause, so we must prorate liability.
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Id. at 210.
Measured against St. Paul Mercury’s interpretation of
Hardware Dealers, the district court read the Supreme Court’s
decision too narrowly, and incorrectly determined that no conflict
existed between the Royal and Hartford provisions. The fact that
Hartford’s policy contained an escape clause and Royal’s policy
contained a pro rata clause does not distinguish this case from
Hardware Dealers. According to St. Paul Mercury, this case appears
to be just another permutation of the conflict explained in
Hardware Dealers. Viewed from the perspective of Riverside, the
insured, one finds that Hartford provides coverage for the
underlying suit if Royal’s policy did not exist. Similarly, one
sees that Royal provides full coverage for the underlying suit if
Hartford’s policy did not exist. A “reasonable construction” of
the two policies from this perspective yields a conflict.
Therefore, the substantive step of Hardware Dealers applies: both
Royal and Hartford are liable proportionally, and both had a duty
to defend Riverside.4
III. Defense Costs
4
In a related argument, Royal contends that the district court
violated Texas’s anti-stacking rule. This is incorrect. Under the Texas “anti-
stacking rule,” if two insurance policies both cover one occurrence, the insured
may recover only the limit of one policy. Am. Physicians Ins. Exch. v. Garcia,
876 S.W.2d 842, 853-54 (Tex.1994). This prevents “self-injury” and other
insurance fraud. The district court’s interpretation is that Royal’s policy
constituted primary coverage and Hartford’s policy provided excess coverage.
This is the way the insurance system works — excess insurers provide additional
coverage above and beyond that of primary insurers. This interpretation,
although incorrect, does not violate the anti-stacking rule.
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As we have concluded that Royal is entitled to contri-
bution for settlement costs, there is the lingering issue whether
Royal is also entitled to recover defense costs. Because the
district court did not address this issue and the case is being
remanded for a pro rata liability distribution, we do not reach the
issue of defense costs. However, we note the following.
Under Texas law, “the duty to defend does not arise until
a petition alleging a potentially covered claim is tendered to the
insurer.” Lafarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389,
400 (5th Cir. 1995) (Garwood, J.) (citing Members Ins. Co. v.
Branscum, 803 S.W.2d 462, 466-67 (Tex. App.--Dallas 1991, no
writ)). Here, Hartford had no duty to defend — and thus cannot be
required to pay any of Royal’s defense costs — until the underlying
suit implicated Hartford’s policy and the insured tendered the
complaint to Hartford. Based on the record, it appears that
Hartford did not have the complaint until six weeks after the
plaintiffs amended their complaint, well after Royal began
defending the suit. See, e.g., Dist. Ct. Op. (RE Tab 2) at 19.
Under Texas law, Royal would only be entitled to post-notification
defense cost. However, Royal waived any claim to those costs in
its Reply Brief.
Conclusion
For the aforementioned reasons, we REVERSE and REMAND for
proceedings consistent with this opinion.
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REVERSED and REMANDED.
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